Advanced Micro Devices Faces Significant Challenges

Shares of Advanced Micro Devices (NASDAQ: AMD) , the longtime rival to Intel (NASDAQ: INTC) in the PC processor market, plunged following the company's earnings report. The actual second-quarter numbers weren't terrible relative to expectations -- coming in line on revenues and missing by a penny on the earnings per share line -- but the guidance fell significantly short of expectations.

Intel's Bay Trail appears to be taking low-end shareAMD's computing solutions group saw a 20% year-over-year decline in sales. AMD noted that it sold a richer mix of products (which implies higher average selling prices), implying that units were down in excess of 20% year over year.

This is share loss to Intel's low-cost Bay Trail-M and Bay Trail-D notebook and desktop products, respectively. While Bay Trail-T (the tablet variant of Bay Trail) drove a bill of materials too rich for very cheap tablets (driving a need for contra-revenue offsets), it faced no such issues for low-cost PCs. Further, the cost structure appears good enough that even with these processors driving 60% of Intel's low-end PC chip mix (and 20% of total notebook mix), Intel is reporting eye-popping gross margins (64.5% in the most recent quarter; 66% guided for the current quarter).

AMD's Lisa Su even addressed this on the company's conference call:

So if you take a look at U.S. specifically about Bay Trail and we certainly see Bay Trail no question about it, we see them at, very, very low entry price points going up into the mainstream of the notebook and desktop market. And there are places where we chose not to compete because it's just not profitable business.

This appears to be an admission that AMD doesn't have the cost structure to defend itself against Intel's 22-nanometer Bay Trail parts in the low-cost PC market. Given that Intel is projecting that costs for its next-generation 14-nanometer Celeron/Pentium products due in 2015 will be lower than this year's Bay Trail-M/D, and given that the cost per transistor at the 20-nanometer foundry nodes (which AMD will be beholden to) go up, it's difficult to see AMD improving its competitive positioning here.

Source: Intel.

Graphics and console business not driving as much upside as thoughtInvestors seemed to be expecting a large uptick in game console chips during the second half of the year. However, AMD noted that these chip sales will be spread more evenly across the year (which helped Q1/Q2, but will mute a potential ramp into Q3/Q4). Further, AMD is calling for game console chips to peak in Q3 in contrast to last year, when AMD saw a sequential increase in game console chip sales in Q4. This was likely a surprise to investors/analysts, and now models are being updated to reflect this Q3 peak.

The company also saw discrete graphics card sales (particularly for the enthusiast/add-in-board market) slump this quarter as a result of a flood of used cards hitting the market as demand from crypto-currency miners softened (likely as a result of dedicated chips for mining hitting the market).

Is there hope?At this point, we know what went wrong, but is there any reason to believe in the company's turnaround? There's hope that eventually the semi-custom and embedded businesses can offset the PC decline, but that remains to be seen given that the PC business is still a huge part of AMD's revenues (and it's likely that Intel will continue to gain share).

There's also the possibility that AMD could gain share on NVIDIA in discrete graphics, but it would be unwise to underestimate NVIDIA's competitive positioning. Finally, there's a chance that ARM-based servers could gain traction and that AMD would be well-positioned to benefit, but that -- again -- requires going up against behemoth Intel.

In short, there's a whole lot of uncertainty surrounding the AMD story, and the post-earnings share price drop reflects that.

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Intel's gross margins are at record high levels because they have literally 100% of the server market and that part of the market is still growing. The corporate market PC refresh due to WinXP EOL is also helpful. Intel sells high margin Haswell cpus into that segment. Atom has nothing to do with Intel's improved margins.

btw you believe cost per transistor goes up at foundry 20nm and not at Intel 14nm. This when TSMC 20SOC and GF 20LPM are planar nodes with double patterning while Intel 14nm is FINFET node with double patterning. this is what I call bias.

Intel is requiring a new F step even for Core M to sort out yield issues. The volume in Q4 2014 is a trickle with the real volume coming in H1 2015.

Broadwell desktop is delayed to H2 2015. I would bet that Skylake and Broxton are 2016 products given that Intel has a lot of new products to ramp in 2015. Broadwell - tablet,mobile,desktop,server.

Atom - Cherrytrail.

btw Beema and Kaveri have just started selling. AMD spoke of commercial design wins from other OEMs which ramp in Q3. HP was the first out with Elitebook. Its premature to say anything until we see another 2 quarters of AMD CS revenue. AMD stopped a fall in CS revenue sequentially or q-o-q. lets see how H2 2014 plays out before getting into 2015.

It seems that AMD has anticipated the share loss at lowend market. They have given pretty accurate revenue projection last quarter.

I also agree that when Intel's 14nm products come out, AMD will face more erosion of its market share though probably not at low end since this is still at early stage of 14nm roll out.

While you cited a few opportunities for AMD to offset lowend PC loss, I, however, have more hope on AMD adopting 20nm process in 2015 and maybe gain some market share back. AMD cannot find enough business elsewhere to offset its PC market.